Risks of economic interdependence

By Eric Chiou 邱奕宏

Furthermore, the vulnerability dimension of asymmetrical interdependence is crucial in empowering one nation to affect another, since that vulnerability means that the nation will suffer from costs imposed by the other’s policies even after it has made its own corresponding policy adjustments.

In regard to Sino-Japanese economic relations, Japan seems to be more vulnerable than China if economic ties were to be cut. Even though Japan is China’s second-biggest trading partner, accounting for 9 percent, or US$345 billion, of its total trade, China is Japan’s largest trading partner, representing 21 percent of Japan’s exports and imports last year, which is double the size of Japan’s second-largest trading partner.

Thus, Japan needs China as a primary overseas market far more than the other way round. Additionally, Japanese investments in China have climbed to US$6.3 billion in the past year, ranking Japan No. 3 after Hong Kong and Taiwan, suggesting that Japanese companies have become increasingly dependent on China as a major production center.

All these statistics indicate that this economic interdependence seems to play in favor of China rather than Japan. If economic warfare breaks out, Japan may suffer more than China does, since the former is the one more dependent on China and more vulnerable to its policies.

Apparently, China is aware of its advantages in this asymmetrical relationship and has been willing to aptly exploit this “Achilles’ heel” by imposing pressure on Japan. The incident of a Chinese fishing boat captain being arrested by a Japanese Coast Guard vessel off the Diaoyutais in 2010 has demonstrated that China is capable of manipulating economic leverage to achieve its political goals. By imposing export bans on rare earth materials, over which it has a near-monopoly, China compelled Japan to back down and release the fisherman.

Hence, an editorial in China’s the People’s Daily last month warned that China was willing to defend its territorial integrity by launching an economic war against Japan, despite the enormous costs it would have to bear.

Regardless of this nationalist rhetoric, China has not taken any explicit economic actions to punish Japan, except for canceling its top officials’ participation in the IMF meeting held in Tokyo and other bilateral social and economic exchange activities.

Already affected by a slowdown in economic growth as well as the gloomy prospects of the global economy, Beijing certainly does not want to exacerbate the current dire economic climate by pouring oil onto the fire, since a sudden withdrawal of Japanese companies from China would cause undesirable consequences, such as rising unemployment and social unrest.

Nevertheless, the reluctance of Beijing to further use its economic leverage to punish Japan certainly does not stop Chinese people expressing anti-Japanese sentiment by boycotting Japanese goods and cars. In addition, many Japanese shops and factories were forced to shut down or suspend operations during the period of anti-Japanese protests in China last month. Japan’s tourism industry and airlines also suffered a heavy blow, with tens of thousands of flight cancelations from Chinese tourists.